By DailyFX - Dollar Rises Against Yen, But Slips against Euro: Why is there such Divergent Price Action? When talking about US dollar strength...

... or weakness, traders these days need to distinguish between whether they are talking about the dollars value against the Euro, British Pound, or Japanese Yen.


For most of the week, we have seen the dollar fall in value against the
Yen while strengthening against the Euro and British pound. Today, the
price reaction in the currency market was the exact opposite with
USD/JPY, EUR/USD and GBP/USD all rising. Many people may be wondering
why there is such a big divergence in the US dollars performance. In
order to understand the possible reasoning behind the movements, traders
need to realize that the purest reflection of the markets sentiment
towards the US dollar is seen through the currencys value against the
Euro. We have long called the EUR/USD the anti-dollar because it moves
most often on underlying US fundamentals. Today is a perfect example as
softer retail sales, producer prices and business inventories sent the
dollar tumbling against every other currency except for the Japanese
Yen. USD/JPY on the other hand, is a different animal. With the
Japanese having no plans to raise interest rates and the carry advantage
so skewed in favor of the US dollar, the main driver of the movement in
USD/JPY has been carry. If you look very closely, you will actually see
that it is buying of the yen crosses that is leading USD/JPY higher. On
a percentage basis, the movements in EUR/JPY, AUD/JPY and GBP/JPY have
been far greater than the movements of USD/JPY. The correlation between
the Dow and carry trades is something that is not just unique to USD/JPY
and in fact relates to the entire basket of carry trades. Todays
inflation, business inventories and consumer spending data tells us that
the US economy is still in a precarious position. Both retail sales
and core consumer prices stalled in the month of April. Although there
are some external factors that may distort these results such as an
early Easter, the sheer downward surprise does suggests that consumers
are feeling the pain of high gasoline prices. In the week ahead,
inflation will be a big focus for the currency market. Even though
gasoline prices did not hit PPI significantly, we do expect to see a
greater impact on consumer prices or CPI. In addition to the inflation
data, we are also expecting reports from the manufacturing sector. The
weak dollar should continue to help the sector recover. Overall, based
upon these expectations, we could see the dollar resume its strength
next week.

Evidence that Euro Strength is Alleviating Inflation Pressures Could be
Seen Next Week

The Euro has finally rebounded after three straight days of weakness on
the back of weaker US economic data. There was no European data
released last night. Yesterday, the ECB left interest rates unchanged
and President Trichet failed to comment on further rate hikes aside from
the one that is priced in for June. Interestingly enough, we are
beginning to hear less hawkish commentary from Eurozone officials. ECB
Constancio said this morning that he expects inflation to be at 2
percent or less this year. This comment comes at an opportune time as
the market turns its focus on inflation next week. The Eurozone, France
and Germany are all releasing consumer prices. We are expecting softer
inflation growth because the rise in gasoline in the US is mostly a
domestic issue. Also, the prior strength in the Euro further reduces
inflation pressures. Meanwhile in addition to CPI, we are also
anticipating GDP and Eurozone industrial production. At this point, it
will be difficult for the EUR/USD to strengthen beyond its all time high
of 1.3680.

British Pound Rebounds despite Mixed Economic Data

Like the Euro, the British pound has also strengthened today against
the US dollar and Japanese Yen. There were only a few secondary reports
released including wage growth, department store sales and the NIESR GDP
estimate. According to those reports, wage growth held steady, consumer
spending growth slowed and GDP is estimated to be unchanged from the
pace of growth seen in the first quarter. All three of these indicators
are beginning to show the difficulties that the UK economy may be facing
with the pressure of a strong currency and higher interest rates. We
already saw the trade balance for the month of March hit a 10 month
high. Next week, we expect similar weakness in unemployment, leading
indicators and possibly even retail sales. As for PPI and CPI, the
strength of the pound should alleviate inflation pressures. The Bank of
England will also be releasing their quarterly inflation report, which
tends to be a market mover.

Yen Crosses Rebound Strongly Thanks to Dow Rally

The strong rebound in the Dow today has led to a strong rebound in the
Yen crosses. It appears that the movement in the US stock market is the
only driver of trading for the Japanese currency these days. There was
no data released last night, although China did report a larger than
expected trade surplus (our China Weekly has more details). Meanwhile
the Japanese data calendar next week contains a number of important
releases including CGPI, current account, industrial production, GDP,
tertiary activity index and the Bank of Japan rate decision. The
central bank is not expected to change interest rates, but the current
account, GDP and tertiary activity index could benefit from the recent
yen weakness.

Commodity Currencies Rally as Carry Trades Resume Their Rise

The Australian, New Zealand and Canadian dollars were all up strongly
today. With no Australian and New Zealand data released the rally has
been predominately driven by demand for carry trades NZD/JPY is up a
whopping 1.38 percent while AUD/JPY is up 1.12 percent. Even CAD/JPY
managed to reverse earlier losses despite a much weaker Canadian
employment figure. The market was originally looking for 19k jobs to be
added to the economy in the month of April, but instead, the country
shed 5.2k jobs. It is about time that we see the strength of the
Canadian dollar have a detrimental impact on the economy. Meanwhile in
the week ahead, New Zealand and Canada are both releasing retail sales
and inflation data. Australia on the other hand only has housing
finance and wage costs due for release.


DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com


FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials. FXCM, L.L.C.® does not warrant the
accuracy or completeness of the information, text, graphics, links or
other items contained within these materials. FXCM, L.L.C.® shall not be
liable for any special, indirect, incidental, or consequential damages,
including without limitation losses, lost revenues, or lost profits that
may result from these materials. Opinions and estimates constitute our
judgment and are subject to change without notice. Past performance is
not indicative of future results